No reason to shop for Somerfield now

Computacenter continues to face difficult challenges; Reg Vardy is motoring along, but now it is time to take some profits

Somerfield has been through the ringer in its time as a publicly quoted company and the supermarket group is still struggling to find any sort of consistency.

This was demonstrated by the company's full-year figures yesterday which, on the positive side, showed a creditable bounce back to profits of £22m compared with losses of £13m the previous year. There was also a return to the dividend list for the first time since April 2000 with a pay-out of a penny a share.

But the inconsistency was in its like-for-like sales performance. Underlying sales in the 12 months to April were up 1.8 per cent on the previous year, with the Somerfield stores up 1.4 per cent and the Kwik Save branches ahead by 2.5 per cent. But in current trading things have started to slide with both chains in negative territory.

John von Spreckelsen, the chairman, says this is partly due to the impact of the football World Cup, but also because the group is up against strong comparisons with this time least year, when sales were boosted by price promotions he felt were not sustainable. The numbers should improve in the second half, he says.

The worry is that while the business has stabilised and renegotiated its banking facilities, it is struggling to build profitable top line growth.

The Somerfield chain is doing reasonable well. Twenty-four stores have undergone a full refit with sales uplifts of 22.5 per cent. As the ranges are improved to include more fresh foods and ready made meals, margins are better too. A hundred more stores will be upgraded this year with the remainder finished by 2005.

The problem is Kwik Save. The group has yet to decide on a new format that it is confident will work and this is crucial for the share price.

On analysts' current year profit forecasts of £45m the shares – which slumped 10.5p to 105.5p – trade on a forward p/e of 12. There is no reason to buy in now.

Computacenter continues to face difficult challenges

Computacenter is known in the IT trade as a "box shifter", a middle-man which sells computers on behalf of the big PC companies. In the middle of an IT recession it is not the best business to be in and the group's strategy has been to cut costs and increase its exposure to IT services, such as software sales and consultancy. This seems to have done the trick in the short term and enabled the company to continue riding out the storm.

Computacenter said yesterday that its performance in the first half of 2002 had been in line with expectations. Furthermore, if current market conditions continue, the company expects this year's profits to be similar to last year's £51m. Any growth in profit relies on an improvement in market conditions.

But IT spending has remained depressed and conditions in some sectors, such as investment banking, have actually got worse this year. Given that Computacenter derives about a third of its sales from the investment banking and telecoms sectors, both of which are continuing to cut spending, the company will continue to have a challenging time.

That is hardly a revelation. But what will really hurt it is if conditions get markedly worse and if its IT services division comes under pressure.

Analysts predict Computacenter will make a profit of about £50m this year, translating to earnings of about 18p a share, on sales of about £2bn.

With the shares up 9p to 291.5p, that puts the stock on a forward multiple of 16. A hold, at best.

Reg Vardy is motoring along, but now it is time to take some profits

These have been good times for car dealers. Lower interest rates make car repayments seem more affordable. Rising house prices make consumers feel richer. Combine this with falling car prices and a steady stream of popular new models, from the Mini to the X-type Jaguar, and it is not hard to see why new car sales hit record levels last year.

Reg Vardy has been one of the key beneficiaries, though its shares have started to decelerate after a six-month, gear-crunching surge.

Yesterday's results showed record full-year profits of £32.6m on sales up 6.4 per cent to £1.4bn. The company is so confident that it is now aiming for annual sales to reach £2bn within three years via organic growth and acquisitions.

Will this be enough to deliver fresh support for the shares? The business is lowly geared and so has the financial muscle for deals. These in turn should lead to greater economies of scale and higher than average earnings growth.

There is also the prospect of revisions to the block exemption system in Europe this month which will cut manufacturers' say in where their cars are sold.

The risk to the shares lies mostly in the outlook for consumer expenditure. Rising interest rates could limit demand in the already weakening contract hire sector.

Assuming profits of £35m in the current year the shares – which fell 23p yesterday to 350.5p – trade on a forward p/e of 8, against forecast earnings growth of 7 per cent. Not overly expensive, but after a good run, investors who have been in for a while might consider taking some profits.